Early Thursday morning, Digitimes released an article stating that "Himax Technologies reportedly has landed orders for LCoS (liquid crystal on silicon) solutions from Google for its Google Glass devices".

The report came in the wake of my Monday evening SeekingAlpha article, which speculated that Himax (NASDAQ:HIMX) was the likely winner on Google's (NASDAQ:GOOG) Glass project. That article cited some impressive research done by industry veteran Karl Guttag, which confirmed that a HIMX LCOS solution was used in Glass prototypes. My team expanded on Karl's work, gathering evidence on whether HIMX would get designed into the commercial-launch version of Glass. We determined the likelihood was very high and released our findings via SeekingAlpha.

In response to our article, Mr. Guttag provided some thoughtful commentary, prudently challenging our assumptions without refuting our facts. The comments sparked a constructive exchange, with Mr. Guttag providing key factors to research and me directing my team's research efforts and reporting on the results.

The cumulative exchange provided a fine example of how to build conviction in a material non-public event by gathering several pieces of publicly-available data points:

Mark,

Thanks for referencing my blog and your kind words about my expertise, but I would like to correct/comment on a few things in your article and related comments.

As my blog (and other comments) have pointed out, I think it is unlikely that Google is using a Himax LCOS panel in the newer design. I was just pointing out the fact that the old prototype used a Himax panel. Himax's current LCOS site does have the appearance of being "abandoned" with broken pages and missing links.

It is no simple matter to go from reflective LCOS to a transmissive panel as the technologies to form the transistors are radically different. The major technical different that it requires the transistor to be on a glass/clear substrate rather than silicon. There are other companies such as Kopin and Epson and others who are much more established players and are much more likely to be providing transmissive panel than Himax. I don't know what information you got from Himax, but there is a chance that there was a communication error.

Himax has sold their color filter LCOS panels into products sold in China and/or India for several years. So selling 20K in a quarter would not necessarily indicate a build up for Google Glass.

Additionally as my blog points out, I am more than a little skeptical that any head mount display, including Google Glass, is ready for "prime time" high volume sales any time soon. Just because a lot of companies are looking at and researching something does not mean that it is about to happen in high volume. Head mount displays while solving some problems, have a hole host of issues that have I have yet to be convince have been solved.

Karl

At that point, shares of HIMX began to give up their early gains. We had not divulged the details of our proprietary research, much of which addressed Mr. Guttag's otherwise justifiable concerns. I sought to rectify that. Further, given my great respect for Karl Guttag's expertise, my team redoubled our efforts to see if the remainder of his concerns would prove our thesis invalid or not.

After some additional due diligence, the following response resulted:

Hi Karl,

First, I thank you for your note…and more so for the expertise you routinely share on your blog. I believe it is a must-read on the topics you cover.

In regards to your comments, I concede all technical points. You are by-far the expert on this subject. Along those lines, I read and understood your thoughts regarding the likelihood of Google of utilizing a transmissive panel in the commercial-launch version of Google Glass.

It would be understandable to dismiss Himax on that basis. Indeed, their website could use some updating, but I assure you that it's functional.

Comparisons to past iterations (via Google's Wayback Machine) show that changes are made fairly regularly. Most importantly, its ties to LCOS are alive and well. My colleagues and I have contacted several folks in the industry to check on the status of each competitor's offerings. Specific to HIMX, I asked the company directly. This was the response:

Mark,

I just heard back from the CFO, Jackie Chang, on your question.

The answer to your first question is "Yes" the Company does offer a transmissive color filter device.

Best regards,

John MattioMZ Group |Senior Vice President - MZ North America

I have no doubt in your assessment of the difficulty involved with moving from a reflective LCOS to a transmissive panel. Not surprisingly, my communications with Gartner Group yielded no refutation to any of your expertise either. However, I believe that the feedback from HIMX's CFO would imply that they have indeed crossed those tough, but surmountable hurdles. Indeed, $80 million of annual R&D spending can go a long way.

Further, as your excellent detective work revealed, they were in the prototype. While that's no guarantee of being designed into the final product, indications seem to point in that direction, including the company's claim to offering a transmissive CF device, along with its ability to offer Google a color sequential device, should they choose to pursue that path in future versions. I haven't been able to identify any other company that offers this combination of capabilities.

As for your skepticism regarding the readiness of Google Glass for prime time, that is surely the debate du jour! Sergey Brin certainly did his best to show what Glass can currently do and moved up Google's timeline for launch. I can only assume that they feel confident in the progress they have made.

I have no doubt that the first iteration will reveal issues that will need to be addressed. Battery life and price come to mind. That being said, it is my understanding that HIMX is mulling a multi-fold increase in its manufacturing capacity, which is already measured in the millions.

Frankly, I wouldn't consider a couple million units to be a runaway hit. However, for HIMX it would represent substantial upside relative to what is currently baked into the Wall Street estimates. Such upside and future prospects could move the stock toward the "growth" category in investors' minds which would warrant a EV-basis P/E far in excess of the single-digits it commands today.

In short, I don't refute any of your points -- our facts are not in conflict. Rather, your research and mine seem complementary.

Thanks again for your generous contribution. I welcome the honor of any further thoughts. My curiosity is always piqued by the pursuit of the truth and you provide much to the world in that regard!

Kindest Regards,

Mark G

Mr. Guttag responded in kind:

Mark,

I have no position or motivation to help or hurt Himax. But I would suggest you click around the Himax website. Instead of pictures and links that used to be there, I see a lot of "¡@" everywhere. I have tried with three different web browsers and get the same result.

To my understanding Himax pretty well failed with color sequential LCOS. They had an analog design (Syndiant was/is digital) that didn't work very well. If they are working on transmissive, it is a big secret and I doubt they would be competitive with companies like Kopin and Epson that have well of a decade of production. It is a whole different way of making the devices and could cost well over $100M to set up the factory and likely world would have leaked out). It is not impossible, but IMO very unlikely.

The color filter LCOS was a tough business because it was a low resolution device with lower color quality and had to have low selling price.

The word in Asia (over a year ago) was that Himax was pretty much giving up on LCOS and bought what was left of Spatial Photonics in November 2010 (search "Himax Spatial Photonics"). Which was in effect as TI DLP clone (MEMs mirror array). The speculation was that they would be trying to sell these in China to avoid U.S. lawsuits by TI's DLP.

One thing that surprised me is why Google even messed with an LCOS device when a transmissive panel such as by Kopin would have been a so much simpler design in the first place. LCOS to me would make sense if the resolution was much higher and/or the output was much brighter than near eye.

While it would be exciting for some company to have a deal with Google, the performance requirements in terms of resolution for Google Glass's very small display are very low. I would guess that the panel would only sell in high volume for about $5. Even if you sell 2MU of these that's only $10M gross. Even if they got $10/unit (which I think is the upper price I could see for a low resolution panel) this still is only $20M gross revenue. Once you subtract the cost of making them I don't see how the panel maker going to make much in the way of profit.

Anyway that is the way I see it.

Karl

My conviction was still very strong, but conviction can never be too high. Thus, I again mobilized my team to address the latest set of potential holes in our thesis. It took several hours to craft this response:

Hi Karl,

Thanks again for lending your expertise on this subject. I think everyone can see that your motivations are purely to uncover the truth about the progression of this exciting market. In many people's eyes, my motivations are apparently more questionable! But as an American, I believe everyone is entitled to their opinion. :)

Frankly, I believe we both just seek the truth. If HIMX is unlikely to serve GOOG's needs, I will graciously reverse my stance. I would also probably purchase shares of KOPN, since their odds of being designed into GOOG would be higher if HIMX's odds are lower. However, after doing some research on your concerns, I still believe HIMX is the most likely beneficiary.

Here's what I've found:

First, addressing the trouble you've encountered with their website, I've clicked around the site often. I see the "¡@" that you see, but I also see their product information. I did have some initial issues with a Firefox browser, but no issues with Explorer. I've provided a link and screenshot in an instablog post entitled More HIMX Information & Product Website.

From what I've gathered, HIMX didn't give up on LCOS. It's actually a growing revenue line for them. To your point, it appears that they had to work very hard to build its transmissive and color sequential capabilities. Via their earnings calls and direct discussions with company representatives I have also gathered the following:

• They've been working on these capabilities for several years, investing over $300 million into R&D over the past four years (imagine what could be done with a budget like that!). By comparison, KOPN's R&D spending over the same timeframe has been just over $80 million (this is not a knock on KOPN; just a reference point…I happen to like their positioning and its prospects for Golden-i)

• They made it clear that they are not publicly disclosing all of their capabilities and/or offerings for competitive purposes.

• They do have a LCOS factory (public knowledge). In fact, LCOS is the only thing they produce in-house. I have also ascertained that it was built for scalability, such that 5M units/year of capacity can be added for $25 million.

• The company has stated that the LCOS we are discussing has an ASP in the $15-20 range, so it has to be a bit more sophisticated, since lesser components would be closer to $5 apiece. At $15 per unit, the revenue-ROI on factory expansions is four months and the margin-ROI is about 8-12 months.

Adding that $15-20 to the ASPs on the other parts listed above, HIMX has the capability to reap well in excess of $50M of revenue from a 2 million unit order. As the market and competition expands, that 2 million / $50M can quickly move to 20 million / $500M.

For the sake of my readers, I reiterate my stance that I don't refute any of your technical claims (to do so would be lunacy!). My background (going back to my hiring at IDC in 1994) is in working closely with industry experts (such as yourself!) and digging up key data points - pieces of a mosaic that has yet to be fully revealed to the general public :^)

Frankly, I see plenty of room for MANY vendors to benefit. I have simply started with HIMX, due to my calculation of the odds that they are playing a part in Google Glass.

Thanks again for gracing us with your wisdom!

Mark G.

p.s. Here are some additional key comments from the last HIMX earnings call:

"there are quite a few segments which, we believe, as we move along to Q2 and second half, will pick up strongly. And they include among others CMOS image sensors, LCOS microdisplay, touch panel controller, et cetera."

"I just also want to mention LCOS. I think starting second half hopefully, we will some exciting growth, but probably certainly much less, though, in the first half when we will still be going through engineering runs with our customer. But that is on panel display. And there are non-panel display applications that we are working along with a few leading players in the world. So we are excited about that. But again, in terms of LCOS, you won't really see meaningful volume until second half of the year."

Unmistakably, they are working on SOMETHING that is coming out in the back half of the year… ;^)

Investors were notified of this posting via Twitter (see my SeekingAlpha profile for more details), but with just minutes left in the trading day, the shares closed uneventfully. Several hours later, the Digitimes news broke.

Whether those claims prove accurate remains to be seen (nothing is a certainty until press releases go out or SEC filings are made). Nonetheless, my team's efforts demonstrated that extensive research can at least get an investor pointed in the right direction.

Stay tuned. We continue to seek additional information on Google Glass and other augmented reality projects. Many of our findings will be released via SeekingAlpha as events unfold.

Disclosure: I am long HIMX. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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